South Korea’s Central Bank has raised concerns over Central Bank Digital Currency (CBDC), according to the report published by Bank of Korea (BOK) on February 07.

The report was prepared by the Korean Economic researchers which illustrated how a CBDC issuance might affect the liquidity at commercial banks.

CBDC deposits would radically lower the supply of private credit by commercial banks. As a consequence, the banks will likely increase their interest rates and it will further lead to a decline in their reserve-deposit ratio.

The report while referring to the CBDC states that “This has negative effects on financial stability by increasing the likelihood of bank panic in which commercial banks are short of cash reserves to pay out to depositors.”

Kwon Oh-ik, an economist and one of the co-authors of the Bank of Korea report, stated “The central bank digital currency is a kind of a BoK-issued bank account. People trust it more than one in a commercial bank. Demand deposits are one of the biggest sources of loans for banks. When people pull out their money, banks raise rates, or lower the reserve ratio, to secure more funds.”

Kwon further indicated that the BoK, which has conducted and recently completed long-term research on cryptocurrencies, should be more careful and analyze any negative outcomes that could arise from the issuance of a CBDC.

In November 2018, Christine Lagarde, Managing Director of the International Monetary Fund (IMF) posted on Twitter that she believes, we should think the possibility to announce digital currency.

The Bank of International Settlements (BIS), acknowledged as the central bank of central banks, also cautioned recently, that if any country’s central bank is seeking to develop and launch a CBDC, it should ‘carefully weigh’ the implications, particularly as they relate to financial policy and overall economic stability.

Will the Korean Central Bank issue CBDC with more plannings in the future? Share your thoughts on the comments below?